Cleaning up the Paper Trail

By Andrew K. Reese On Apr 28, 2004

In working to reduce the 40,000 paper invoices it receives from its supply base every month, Owens Corning has learned that the three most important elements of automating data exchange with suppliers are process, process and process.

When you are a $5 billion company working with about 17,000 different suppliers, you are bound to receive a few hardcopy invoices every month, but that does not make it any easier to swallow the cost of processing that steady flow of paper. In fact, as far as James Hawkins is concerned, the business case for eliminating a large chunk of those paper invoices by automating data exchange with suppliers is pretty straightforward: taking paper out of the transaction helps reduce a company's non-value-added costs.

Hawkins is e-sourcing process leader with Toledo, Ohio-based Owens Corning, and he is quick to point out the costs associated with the traditional accounts payable paper chase, as well as the potential benefit of reducing the number of invoices that a company receives from its suppliers. "We were processing somewhere in the area of 40,000 invoices [per month] at somewhere around $4 a pop," he recalls, using an internal estimate for the cost of processing each paper invoice. "If you cut that in half, then you've wiped out 20,000 invoices at $4 a piece." Assuming that the cost of automating those invoices is less than the $80,000 in savings per month, Hawkins concludes, "this must be a good idea."

Owens Corning, whose 17,000 employees manufacture a variety of composites and building materials, has been something of a pioneer in adopting technologies to streamline its sourcing and procurement. For example, the company, which has an annual spend of about $3 billion, was among the first to use online reverse auctions, running its first event back in April 1999. Over the years, using FreeMarkets, Perfect Commerce and, finally, Ariba's self-service e-sourcing tool, Owens Corning has run more than 500 events and achieved substantial savings. But with the company's margins under continuous pressure, Owens Corning looked beyond reverse auctions for other means of reducing costs. "As we looked in the sourcing arena," Hawkins says, "we found that we were spending a great deal of time, effort and money processing paper invoices for payment. So we saw a great opportunity to lower these costs."

A Multi-pronged Approach

In attacking the paper invoice challenge, Owens Corning has applied several different solutions. The company has instituted a purchasing card program, for example, and is currently doing about $100 million a year in spend through the p-card. That eliminated the need for a formal receiving process for goods bought on the p-card, took the invoice out of the equation for those purchases, and alleviated the requirement to have a shared services group opening mail and entering those invoices into the company's SAP financial backbone.

Elsewhere, Owens Corning has moved to working with a variety of suppliers using evaluated receipt settlement. "With ERS," Hawkins explains, "we essentially say, here's our negotiated price, say, a dollar for every unit, you shipped us 10 units, so we owe you $10." Again, this process eliminates the need for an invoice. To date, Hawkins estimates that Owens Corning has moved about 10,000 invoices into an ERS arrangement with its supply base.

Finally, back in 2002, Owens Corning elected to explore avenues for automating document exchange with a greater portion of its supply base by moving to electronic data interchange (EDI). The company was already doing EDI with some of its larger suppliers, but Owens Corning figured that it had a significant opportunity to reduce its non-value-added expenses by extending EDI to a greater portion of its supply base. In addition, the company wanted to electronically trade not just invoices but also purchase orders, PO acknowledgements and, with production materials suppliers, advanced shipping notices (ASNs). After all, every time the company took another piece of paper out of its processes, it added to the savings.

Narrowing the List of Targeted Suppliers

The first step in this process, of course, was deciding with whom the company should transact via EDI, beyond those suppliers already using electronic data interchange. After reviewing transaction histories for its supply base, the company used two criteria to narrow down the list of suppliers with which it wanted to connect via EDI. First, Owens Corning identified the top suppliers based on the number of transactions that the company did with each supplier. To make sure that moving to EDI would make sense with each of these suppliers, Owens Corning also verified that the transactions were regular in nature and represented an ongoing relationship with the company. Then they checked that each of the targeted suppliers represented at least $50,000 in business annually with Owen Corning, based on the theory that it would not be cost-effective for smaller suppliers falling under that dollar threshold to do EDI with the company. The result of this process was an initial list of several hundred suppliers that the company would target, representing a variety of services and indirect and direct materials.

Now that Owens Corning had narrowed down the list of suppliers with which it wanted to connect via EDI, the next challenge, naturally enough, was figuring out exactly how to set up that connection. The crux of this challenge, of course, was that not all the company's targeted suppliers were set up to do EDI, and given a cost of as much as $75,000 to $150,000 to establish electronic data interchange capabilities, any number of the suppliers, particularly the smaller vendors, were likely to balk at having to make the necessary investment just to do EDI with Owens Corning.

Fortunately, several solution providers have stepped forward in recent years to offer B2B connectivity services that let large corporations exchange EDI messages with their non-EDI-enabled suppliers through transaction networks and translation services. Owens Corning looked at several of these providers, including Global eXchange Services, Edict Systems and EC Outlook, before settling on Advanced Data Exchange (ADX), an outsourced EDI and XML translation service based in Newark, Calif. According to Hawkins, the choice fell to ADX because the provider had experience with, and was able to handle, the full range of documents that Owens Corning wanted to exchange with its suppliers.

The Cell-phone Plan

Founded some six years ago and currently boasting more than 300 of the Fortune 1000 among its customers, ADX operates a network that links large enterprises with their suppliers to exchange documents. The large enterprises can send, for instance, a purchase order intended for a supplier in EDI to ADX, which translates the document into a format, say, XML or a flat file, that the supplier is capable of receiving. ADX then either sends the file directly into the supplier's back-end systems or allows the supplier to receive and respond to the document using a Web browser interface based on an e-mail paradigm. The supplier responds back to the large enterprise through the network, too, for instance, "flipping" a PO into an invoice or PO acknowledgement that gets sent back, via ADX, directly into the customer's back-end systems. The solution provider offers tools for integrating with suppliers' accounting applications — which, for a small or midsize enterprise (SME), could be something like a Great Plains or QuickBooks package — that helps eliminate re-keying of information on the supplier's end.

ADX typically charges a transaction fee to the enterprise's suppliers. The fees usually get rolled into a cell phone-like plan, whereby the supplier signs up for a subscription that includes a certain number of transactions per month, plus a per-transaction fee for any transactions over the limit. A "starter plan" could run $69 per month for 25 transactions, plus $3 per transaction over that limit. Overall, the provider's prices cover the spectrum from $4 to $0.35 per transaction, depending on number of partners connected with and number of transactions. Andy Duncan, CEO of ADX, says that the plan fee covers the entire cost of doing business with the solution provider, and ADX charges no additional fees for software, connecting to additional trading partners or support fees.

For those Owens Corning suppliers that were not already EDI capable, the company enlisted ADX to recruit its targeted suppliers and get them on the network. The company initially went after its top 200 suppliers, based on the number of invoices that they sent to Owens Corning, and this group was up and running by early 2002, in addition to a group of 100 suppliers with which the company was doing traditional EDI. By the end of 2003, a total of 425 suppliers were connected to the network, along with 200 doing traditional EDI, and in 2004 Owens Corning was aiming to connect with a total of 2,000 suppliers via ADX or EDI, representing 80 percent of its total previous volume of paper invoices.

Tweaking the Business Model

Certainly ADX's revenue model was attractive from Owens Corning's perspective, at least initially, since the company just had to pay a small fee to get connected to ADX, and then its suppliers would pick up the subsequent costs. But, according to Hawkins, while some larger suppliers were willing to sign onto the initiative, the transaction fee structure presented a problem for other vendors, who balked at covering the fees. In some cases, when Owens Corning took a closer look at the business case for signing up a particular supplier, the company decided that it really didn't make sense for the vendor, which was then removed from the list of target suppliers. In other cases, Owens Corning was able to demonstrate the value to the supplier and get them onboard with the initiative. In any event, the concerns of the reluctant suppliers made it more difficult for Owens Corning's category managers and commodity leaders, the folks on the ground managing the relationships with these vendors, to sell the idea of signing onto the ADX network, which in turn made it more challenging for Hawkins and his two project staffers (plus one IT staffer) to fully engage the company's buying community in promoting the project to the supply base.

Ultimately, in order to meet its broader objective of e-enabling a large portion of its supply base, Owens Corning realized it would need to take a different tack. Explains Hawkins: "We wound up stepping back and saying, you know, this business model doesn't really work for the number of suppliers that we're trying to go after and the criteria that we're using, so let's change the business model a bit. Essentially what we wound up doing is changing it so that the supplier pays a monthly subscription fee, which handles their support, and then we pick up each of the transaction fees for documents going back and forth."

By sharing the costs, Owens Corning was able to more easily demonstrate the value for the suppliers in signing onto the program. And Hawkins says that suppliers do, in fact, enjoy benefits from joining the network. "We've already had suppliers comment on their payment being more consistent because we're better able to handle their invoices," he says. With the exchange of documents automated, Owens Corning employees have better visibility into incoming invoices, purchase order acknowledgements and ASNs, so they can check that orders have been received or shipped more easily and without having to get on the phone to the supplier, an efficiency gain for both buyer and vendor. And, Hawkins notes, moving to a shared-cost structure has helped win over Owens Corning's own buying community: "Since we changed the business model, we now have great buy-in internally. Everybody's saying, 'We agree, it's the right business model, and we'll back you up in saying [to suppliers] that it must be done.'"

The Process Focus

Perhaps the most significant benefit for Owens Corning has been that, in undertaking the project with ADX, the company has had to focus on its own internal processes and how it handles each of the documents it was seeking to e-enable. "It's really done wonders for us," Hawkins says, "just in terms of cleaning up our process and being consistent, even in our manual processes, because we've shed light on how things are really being done."

As an example, Hawkins points to how Owens Corning handles freight charges. The company has a number of different ways that it manages freight: It may send out a purchase order on which freight is included, or the freight charges may be additional to what is listed on the purchase order; in some cases, freight should be included in the cost of the product, but not in other cases. The same inconsistencies could turn up on the invoice returned to the company, too. When Owens Corning began considering how to automate its PO process, the company realized that it was not being consistent in how it handled freight either on the purchase side, among its buyers, or on the A/P side, among the shared services staff handling the invoices. Sometimes, during the PO-invoice matching process, the invoices would be allowed to fly through the system, regardless of possible inconsistencies, and other times the invoice would be sent back to the buyer to resolve a mismatch. The company's efforts to automate that process have prompted Owens Corning to take a closer look at how it is handling freight, Hawkins says, leading to more education for the buying and A/P communities to drive consistency in how freight is handled.

Sometimes the very act of automating the exchange of a certain document has led to unforeseen consequences that necessitated a tweak in the company's processes. One example, in Hawkins' own words: "The supplier now receives a purchase order, they fill the order and ship the goods, and, if they're a smart supplier, they immediately send us an invoice. That invoice, because it's electronic, is immediately at our door and goes into our [enterprise resource planning system], which is SAP. SAP immediately looks to see if there is a goods receipt, and because there's not a goods receipt [since the goods have just been shipped], it kicks the invoice out and creates workflow for people to go fix that problem. So our 'kick-outs,' as we call them, rose dramatically on the EDI side because the invoices were just getting here too fast. We had to create a process whereby the invoice goes into SAP and then goes into a holding area, where SAP can continually check for the goods receipt. Once the goods receipt is entered, SAP will process the invoice rather than kicking it out."

With a target to automate 80 percent of its invoices this year, Owens Corning will still be left with some 10,000 paper invoices to process manually. Many of those will come from government agencies or telecom companies — "tough nuts to crack," in Hawkins words — while others will come from smaller suppliers for which the business case doesn't support automated document exchange. Nevertheless, Owens Corning figures it has achieved substantial cost reductions through the project with ADX, not only in terms of the savings from automating invoice-related processes but also from eliminating manual processes for handling purchase order acknowledgements and ASNs. But Hawkins emphasizes that a primary benefit of the project has been in improving the company's processes. "It's a good way to pull out the flashlight, find out what the processes are, clean them up and automate them," he concludes.